THE FRAGMENTATION OF THE MULTILATERAL TRADING SYSTEM: THE IMPACT OF REGIONALISM ON WTO LAW.

Transcription

1 Article THE FRAGMENTATION OF THE MULTILATERAL TRADING SYSTEM: THE IMPACT OF REGIONALISM ON WTO LAW. Musa Njabulo Shongwe* ABSTRACT This is a study of the fragmentation of the multilateral trading system. It evaluates whether and to what extent regional trade agreements have conflicted with World Trade Organization (WTO) law. The substantive and dispute settlement aspects of conflict are the main focus of this paper. Sections of this paper will cover an overview of multilateralism in international trade law, the WTO as a universal regulator of world trade, the proliferation of regional trade agreements (RTAs) and the general implications of regionalism in trade. The main argument presented is that the proliferation of RTAs gradually erodes the WTO s core principle of non-discrimination and, consequently, impairs the coherence of international trade law. Keywords Fragmentation, International Trade Law, Regionalism, Regional Trade Arrangements. I. Introduction The multilateral trading system is facing a great danger of fragmentation. Its modus operandi, multilateralism, is increasingly becoming clogged by trade barriers created by the proliferation of preferential regional trading blocs. 1 This paper explores the fragmentation of the multilateral trade regulation system (World Trade Organization or WTO law) by analysing whether and to what extent Regional Trade Agreements (RTAs) have conflicted with the Multilateral Trading System (MTS). The conclusion of the Uruguay Round of multilateral trade negotiations in 1994 and the establishment of the World Trade Organization in 1995 to provide the *Dr. Musa Njabulo Shongwe LLB (University of Swaziland), LLM, LLD (International law- University of Johannesburg) and Post-Doctoral Research Fellow at the South African Research Chair in International Law. musanjabuloshongwe@yahoo.com. 1 S. Cho, Defragmenting World Trade, Northwestern Journal of International Law and Business , p. 40.

2 4 AMSTERDAM LAW FORUM VOL 9:1 institutional support to the multilateral trade system, constituted a significant milestone in the evolution of the multilateral trading system. It significantly reinforced multilateral control over international trade on a global scale. 2 The whole purpose of the establishment of the WTO was to set up global rules and principles regulating the conduct of international trade and facilitating negotiations for lowering trade barriers, so as to achieve free and fair international trade. 3 However, international trade today is regulated at both the multilateral level under the WTO and at the regional level (including sub-regional and inter-regional level). Almost all countries in the world and virtually all WTO members today are party to or are in the process of negotiating at least one Regional Trade Agreement. 4 Regionalism is thus a permanent feature of the international trading environment. 5 This paper examines the effects of RTA dominance in view of the quest for trade liberalisation. This is an important inquiry because, as will be discussed, the proliferation of RTAs implies the erosion of the WTO law s core principle of nondiscrimination. The paper further explores how the proliferation of RTAs has endangered the coherence of the multilateral trading system. The study is carried out with the initial assumption that RTAs can be complementary and coherent with the multilateral trading system (MTS), and thus facilitate international trade and enhance development prospects. But there is also evidence that is tested by this study, which suggests that RTAs can be divergent and, hence, undermine the WTO multilateral rules of regulating international trade. RTAs have introduced a new level of competition with the WTO. Today, disputes in international trade may not always fall clearly within one of the regimes. This is because a vast increase in regional trade agreements has generated numerous new fora for dispute settlement that coexist with the WTO dispute settlement system, yet the legal interrelation of the different jurisdictions is unclear. The potential for conflicting rules and clashing courts has, thus, increased immensely. It is from this premise that this paper examines how international trade law is fragmented through regionalism. The study commences with a background overview of the WTO as a multilateral or universal institution for the regulation of international trade. This is followed by an examination of the proliferation of RTAs; the rules governing the relationship between the WTO and RTAs explaining instances of conflicts of rules and interpretation; and case studies of conflicts in dispute settlement. The analysis is carried out with the ultimate goal of answering the question of whether the proliferation of regional trade arrangements has caused the fragmentation of the multilateral trading system. This study is limited to examining the WTO-RTA 2 Y. S. Lee, Bilateralism under the World Trade Organization, Northwestern Journal of International Law and Business , p See Article 2 of The Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, entered into force on 1 January, 1995 (hereafter The WTO Agreement ). 4 M. Mashayekhi, L. Puri & I. Taisuke, Multilateralism and Regionalism: The New Interface in United Nations Conference on Trade and Development Publication UNCTAD/DITC/TNCD/2004/7 (2005), p The regionalism represented by RTAs is as much a factor as the multilateralism of the WTO in shaping international trade relations today.

3 5 WINTER ISSUE 2017 relationship through an institutional and regulatory perspective, rather than an economic perspective. II. The WTO Multilateral Trading System The World Trade Organization was established and became operational on 1 January The WTO is the primary international inter-governmental organisation for the regulation of international trade and trade-related matters. 7 This organisation has become a key pillar of global governance. 8 Some commentators refer to the WTO as the United Nations of International Trade. 9 It is important to commence the study of fragmentation of WTO law with a brief examination of the historical regulation of international trade, so as to provide the necessary background against which the rest of the chapter s critique of RTAs may be examined. This background lays out the original idea behind multilateral regulation of international trade, and from that, it will be seen how RTAs have deviated from the original idea of multilateralism. II. 1 Origins and Establishment of the WTO The origins of the WTO lie in the General Agreements on Tariffs and Trade (hereafter: GATT) This is why the WTO is guided by the decisions, procedures and customary practices of the GATT The GATT itself was born from proposals made at different levels in international conferences and at the United Nations. First, at the 1944 Bretton Woods Conference which established the IMF and the World Bank, the conference expressed the need for a comparable institution to complement the IMF and the World Bank. 12 Secondly, in 1945, the United States also invited its war-time allies to conclude an agreement for the reciprocal reduction of tariffs on trade in goods. 13 Efforts to establish the trade organisation gained momentum when the United States also made a proposal to the United Nations. This proposal led to the adoption of a Resolution 14 by the United Nations Economic and Social Council, in 6 See website of the World Trade Organization at (accessed on 3 July 2014). 7 P. Van Den Bossche & W. Zdouc, The Law and Policy of the World Trade Organization, Cambridge: Cambridge University Press 2012, p M.J.E.C. Bronckers, More Power to the WTO, Journal of International Economic Law , p Lee, 2006 supra note 2, p The General Agreement on Tariffs and Trade, WTO Article XVI (1) of the WTO Agreement states that Except as otherwise provided in this Agreement or the Multilateral Trade Agreements, the WTO shall be guided by the decisions, procedures and customary practices followed by the Contracting Parties to GATT 1947 and the bodies established in the framework of GATT United Nations Monetary and Financial Conference (Bretton Woods NH 1-22 July 1944), Proceedings and Documents 941 (US Department of State Publications No. 2866, 1948) at (accessed on 22 July 2013). 13 Van Den Bossche & Zdouc 2012, supra note 7, p UN ECOSOC Res. 13, UN Doc. E/22 (1946).

4 6 AMSTERDAM LAW FORUM VOL 9:1 February 1946, calling for a conference to draft a charter for an International Trade Organization (ITO). Consequently, in February 1946, a Preparatory Committee was established and started working on a Charter for the Organization. The work of the Committee continued in Geneva up to November 1947, but the Charter was not completed until In 1947, negotiations had reached an agreement on the GATT and it was brought into force immediately. Although the GATT was intended to be attached to the ITO Charter, this proved impossible, 16 and even after the ITO Charter was subsequently concluded in Havana in March 1948, it never came into force. The GATT 1947 was, therefore, the only existing international institution for handling trade relations. It was conceived as a multilateral agreement for the reduction of tariffs, which would later be transformed into an international organisation. Transformation began with the Uruguay Round of Multilateral Trade Negotiations. The Punta del Este Declaration explicitly recognised the need for institutional reforms in the GATT system. 17 Other more formal proposals for a multilateral trade organisation followed. In April 1990, Canada formally proposed the establishment of a World Trade Organization which would administer the different legal instruments relating to international trade developed in the context of the ongoing negotiations. 18 In July 1990 the European Community proposed that the GATT needed a sound institutional framework to ensure effective implementation of the results of the Uruguay Round. 19 Again in 1991, the European Community, Canada and Mexico drafted a joint proposal that served as the basis for further negotiations, resulting in the Draft Agreement Establishing the Multilateral Trade Organization. This agreement was part of the 1991 Draft Final Act embodying the results of the Uruguay Round. 20 The Agreement Establishing the World Trade Organization was finally signed in Marrakesh in April 1994, and entered into force on 1 January, The universal 15 J. Jackson, The World Trade Organization: Constitution and Jurisprudence, London: Royal Institute of International Affairs 1998, p Van Den Bossche & Zdouc 2012, supra note 7, p The Declaration stated that: Negotiations shall aim to develop understandings and arrangements: (i) to enhance the surveillance in the GATT to enable regular monitoring of trade policies and practices of contracting parties and their impact on the functioning of the multilateral system; (ii) to improve the overall effectiveness and decision-making of the GATT as an institution, including inter alia, through involvement of Ministers; (iii) to increase the contribution of the GATT to achieving greater coherence in global economic policy-making through strengthening its relationship with other international organisations responsible for monetary and financial matters. See the Ministerial Declaration on the Uruguay Round, GATT Functioning of the GATT System 20 September 1986, Part I Section E. 18 T. Stewart, The GATT Uruguay Round: a Negotiating History ( ), Vol. 3, Deventer: Kluwer Law and Taxation Communication from the European Community: GATT Doc. No. MTN.GNG.NG14/W/42, dated 9 July (1990) 2. See also Van Den Bossche & Zdouc 2012, supra note 7, p Draft Final Act embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, GATT Doc. MTN.TNC.W.FA, 20 December 1991.

5 7 WINTER ISSUE 2017 significance of the Marrakesh Agreement appears in paragraph four of its Preamble, in which members: Resolved to develop an integrated, more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and Trade, the results of past liberalization efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations. 21 This significance was confirmed by the Appellate Body report on Brazil Measures Affecting Desiccated Coconut, where the Appellate Body stated that: The authors of the new WTO regime intended to put an end to the fragmentation that had characterised the previous system. 22 Membership of the WTO also reaffirms its universality. As of 2 March 2013, the WTO has 159 members. 23 Membership of the WTO includes all the major trading powers and most developing countries. 24 Most members have a representative or diplomatic mission in Geneva, where officials attend WTO meetings to present their governments views. 25 Initially, the WTO Agreement provided for two ways of becoming a member. The first was original membership, 26 which allowed the Contracting Parties to the GATT 1947 to join the WTO by accepting the terms of the WTO Agreement and the Multilateral Trade Agreements, as well as by making concessions and commitments for trade in goods and services. 27 The second way is through accession 28 to the WTO Agreement and the Multilateral Trade Agreements. Accession is a multi-phase process in which a prospective member of the WTO also has to negotiate terms of accession with existing members, give information on all aspects of its trade and relevant economic policies, negotiate membership terms and await the important decision by the Ministerial Conference or General Council. 29 Article VI of the WTO Agreement sets out the basic institutional structure of the WTO. At the highest level there is the Ministerial Conference; 30 at the second level the General Council, the Dispute Settlement Body, the Trade Policy Review Body 21 See Paragraph 4 of The WTO Agreement. 22 Appellate Body Report, Brazil Measures Affecting Desiccated Coconut, WT/DS22/AB/R, DSR (1997:1) See website of the World Trade Organization at (accessed on 3 July 2014). 24 See Article XII of the WTO Agreement. 25 Van Den Bossche & Zdouc 2012, supra note 7, p Provided for in Article XI of the WTO Agreement. 27 Of all the WTO members, 123 are original members in that they became members pursuant to Article XI. The period for acquiring membership in this way was closed by the General Council at the end of March Provided for in Article XII of the WTO Agreement. 29 See Members and Accession: Becoming a Member of the WTO Cancun WTO Ministerial Briefing Notes at (accessed 2 August 2015). 30 Established by Article IV:1 of the WTO Agreement.

6 8 AMSTERDAM LAW FORUM VOL 9:1 and the Secretariat. At lower levels there are specialised councils, committees and working parties. There are many subordinate committees and working groups that have been added to the structure by later decisions. The WTO does not have an executive body comprising only a core group of WTO members to facilitate the process of deliberation and decision-making. 31 The Ministerial Conference is the supreme body of the WTO, composed of minister-representatives from all members. It has decision-making powers on all matters under the Multilateral Trade Agreements. 32 The Ministerial Conference is also empowered to adopt authoritative interpretations of WTO Agreements 33 and make decisions on accession. 34 The General Council is established by Article IV(2) of the WTO Agreement. It is composed of ambassador-diplomats representing all members of the WTO. The General Council is responsible for the management of the WTO activities (such as adopting the annual budget and financial regulations) 35 and exercises full powers of the Ministerial Conference. 36 The functions assigned to the General Council also cover dispute settlement and trade policy review. This appears in Article IV (3) and (4) of the WTO Agreement which state that: (3) The General Council shall convene as appropriate to discharge the responsibilities of the Dispute Settlement Body provided for in the Dispute Settlement Understanding. The Dispute Settlement Body may have its own Chairman and shall establish such rules of procedure as it deems necessary for the fulfilment of those responsibilities. (4) The General Council shall convene as appropriate to discharge the responsibilities of the Trade Policy Review Body provided for in the TPRM. The Trade Policy Review Body may have its own Chairman and shall establish such rules of procedure as it deems necessary for the fulfilment of those responsibilities. This means that the General Council, the DSB and the Trade Policy Review Body are the same body, convening under each title when acting in the administration of particular functions. The WTO also has three specialised councils below the General Council, the DSB and the TPRB. These are: the Council for Trade in Goods, the Council for Trade in Services, and the Council for Trade-Related Aspects of Intellectual Property See B.M. Hoekman and M.M. Kostecki, The Political Economy of the World Trading System: The WTO and Beyond, London: Oxford University Press 2001, p. 60; and Van Den Bossche & Zdouc, supra note 7, p Article IV(1) of the WTO Agreement. 33 Article IX(2) of the WTO Agreement. 34 Article XII of the WTO Agreement. 35 Article VIII (3) of the WTO Agreement. 36 Article IV (2) of the WTO Agreement. 37 See Article IV (5) of the WTO Agreement.

7 9 WINTER ISSUE 2017 The WTO Secretariat has the primary responsibility for keeping the WTO network operating smoothly. 38 It is headed by a Director-General appointed by the Ministerial Conference. 39 The Secretariat has no decision-making powers. It acts as a body facilitating decision-making processed within the WTO. The main duties of the Secretariat are: to provide technical support to WTO bodies, provide technical assistance to developing-country members, and monitor and analyse developments in world trade, advising prospective members of the WTO and providing information to the public. II. 2 Objectives and Mandate of the WTO The Preamble of the WTO Agreement sets out the reasons for establishing this international organisation. 40 The aim was multilateral expansion of production and trade in both goods and services throughout the world, including developing countries. This is an organisation created for the establishment of basic rules and principles for the multilateral trading system. As a multilateral organisation, the primary function of the WTO is to provide the common institutional framework for the conduct of trade relations among its members in matters related to the agreements and associated legal instruments. 41 According to Article III of the WTO Agreement, the mandate of the WTO is also to facilitate the implementation of all WTO Agreements, providing a forum for trade-related negotiations, administering the dispute settlement system, conducting trade policy reviews and achieving greater coherence in global policy-making, as well as providing technical assistance to developing countries. 42 II.3 WTO Law, Sources and Basic Principles The principal source of WTO law is the Marrakesh Agreement Establishing the World Trade Organization (the WTO Agreement). This Agreement is the most far-reaching international trade agreement ever concluded. 43 The Marrakesh Agreement is the basic agreement consisting of sixteen articles and Annexes of numerous other agreements included. 44 There are, therefore, many agreements under the Marrakesh Agreement which, apply equally and are binding on all members of the WTO as a single undertaking. 45 These annexed agreements deal with a broad spectrum of issues ranging from tariffs, import quotas and customs formalities to intellectual property rights, food safety regulations and national 38 Van Den Bossche & Zdouc 2012, supra note 7, p Article VI (2) of the WTO Agreement. 40 See Paragraph 1 to 4 of the Preamble of the WTO Agreement. 41 Article II (1) of the WTO Agreement 42 See Article III (1) to (5) of the WTO Agreement. 43 Van Den Bossche & Zdouc 2012, supra note 7, p According to Article II:2 of the WTO Agreement the Annexes (referred to as Multilateral Trade Agreements) are integral parts of this Agreement and are binding on all members. 45 This was confirmed by the WTO Appellate Body in Brazil Measures Affecting Desiccated Coconut, WT/DS22/AB/R, DSR (1997:1) (n 22) at par 177.

8 10 AMSTERDAM LAW FORUM VOL 9:1 security measures. 46 Within the WTO Agreements, there are six groups of basic rules and principles that can be distinguished, which make up the multilateral trading system. Firstly, there are two principles of non-discrimination: the most-favoured nation (MFN) treatment obligation and the national treatment obligation. The MFN treatment obligation requires a WTO member that grants certain favourable treatment to another country to grant that same favourable treatment to all other WTO members. 47 This is a very important rule in WTO law. According to this rule, a WTO member is not allowed to discriminate between its trading partners by giving products imported from some countries more favourable treatment with respect to market access than the treatment it accords to the products of other members. 48 The national treatment obligation requires a WTO member to treat foreign products, services and service suppliers not less favourably than it treats like domestic products, services and service suppliers. 49 This means that once foreign products have entered the borders of a WTO member, they should not be subject to less-favourable taxation or regulation than like domestic products. 50 Secondly, there are rules on market access. These rules require member states to negotiate mutually beneficial reductions of customs duties or tariffs, 51 non-use of quantitative restrictions, 52 financial charges and non-tariff barriers. Thirdly, there are rules on unfair trade which deal with dumping 53 and subsidised trade. These rules do not necessarily outlaw practices of dumping, but allow affected members to impose anti-dumping duties on those particular products so as to offset the dumping. Fourthly, there are rules on conflicts between trade liberalisation and other societal values. These rules allow members of the WTO to take account of 46 Most of the WTO agreements are the result of the Uruguay Round negotiations, signed at the Marrakesh ministerial meeting in April There are about 60 agreements. The Final Act signed in Marrakesh in 1994 is like a cover note. Everything else is attached to this. Foremost is the Agreement Establishing the WTO (or the WTO Agreement), which serves as an umbrella agreement. Annexed are the agreements on goods, services and intellectual property, dispute settlement, trade policy review mechanism and the plurilateral agreements. The schedules of commitments also form part of the Uruguay Round agreements. See (accessed 23 July 2015). 47 Provided for in Article l of the General Agreement on Tariffs and Trade (hereafter GATT 1994) and in Article II of the General Agreement on Trade in Services (hereafter GATS). 48 Van Den Bossche & Zdouc 2012, supra note 7, p See Article III of the GATT This rule applies generally regarding trade in goods. With regard to trade in Services, the national treatment obligation applies only to the extent that the WTO Member has explicitly committed itself (in the Member s Schedule of Specific Commitments on Services) to grant national treatment in respect of specified service sectors (Article XVII of the GATS). 51 Article XXVIII of the GATT Article XI of the GATT Dumping is defined as bringing a product onto the market of another country at a price less than the normal value of that product. See Van Den Bossche and Zdouc (n 19 above) at 676-7; and Van Den Bossche (n 7) 42.

9 11 WINTER ISSUE 2017 economic or non-economic interests that compete or conflict with free trade 54, such as the protection of the environment (which is dealt with in the next chapter), public health, national security etc. The fifth group of rules and basic principles deals with the granting of special and differential treatment to developing country members. 55 The last (sixth) group relates to institutional procedural rules regulating decisionmaking processes and dispute settlement. Put together these rules are meant to facilitate free and fair international trade globally. It appears from the discussions below that the preferential nature of RTAs causes them to deviate from the WTO fundamental principles of free trade, both in their form and in their practice. III. The Proliferation of Regional Trade Agreements (RTAs) Regionalism is described in the Dictionary of Trade Policy Terms as actions by governments to liberalise or facilitate trade on a regional basis, sometimes through free-trade areas or customs unions. 56 RTAs have been successful in achieving trade liberalisation at a much faster speed than the WTO. 57 States, therefore, enter into regional trading agreements for this reason, and for different other reasons, some of which are economic, political and security considerations. This part examines the nature and proliferation of RTAs, as well as how their unclear relationship with the WTO has affected the multilateral trading system. III.1 Defining RTAs Regional Trade Agreements are defined as institutions or groupings of countries formed with the objective of reducing barriers to trade between member countries. 58 These institutions, based on a treaty, may be concluded between countries not necessarily belonging to the same geographical region. Depending upon their level of integration, RTAs can be broadly divided into different categories 59 such as: 54 Provided for in Articles XII, XX and XXI of the GATT 1994, and Articles V, X, XII, and XIV of the GATS. 55 Provided for in Articles XVIII and Part IV of the GATT W. Goode, The Dictionary of Trade Policy Terms, Cambridge: Cambridge University Press G. Dirar Luwam, Multilateralism or Regionalism: What Can Be Done About the Proliferation of Regional Trading Agreements? Cornell Law School Inter-University Graduate Student Conference Papers, 2009, p. 20 available at: (accessed 24 June 2015). 58 The acronym RTA as used in this paper refers to regional trade agreements, preferential trade arrangements or areas as well as free trade areas. Sometimes RTAs take the form of Free Trade Agreements ( FTAs ), Preferential Trade Agreements, or, in some circumstances, Customs Unions: See R.J. Jackson, Global Politics in the 21 st Century, Cambridge: Cambridge University Press 2013, p. 394; Van Den Bossche & Zdouc, supra note 7, p. 651 and J. Frankel, Regional Trading Blocs in the World Economic System, New York: Columbia University Press 1997, pp See P. Pal, Regional Trade Agreements in a Multilateral Trade Regime: An Overview, 2004, at (accessed 23 July 2015).

10 12 AMSTERDAM LAW FORUM VOL 9:1 Preferential Trade Agreements (PTAs), Free Trade Agreements (FTAs), or Customs Unions (CUs). A PTA is a union in which member countries impose lower trade barriers on goods produced within the union. A Free Trade Area (FTA) is a special case of PTA, where member countries completely abolish trade barriers (both tariff barriers and non-tariff barriers) for goods origination within the member countries. A Customs Union (CU) provides deeper integration than an FTA because, unlike FTAs where member countries are free to maintain their individual level of tariff barriers for goods imported from non-member countries, in a CU, member countries also apply a common external tariff (CET) on goods imported from outside countries. 60 The CET can vary across goods but not across union partners. Cross-regional RTAs are also increasingly being negotiated and signed between countries in different regions of the world. 61 Thus, the concept of regional has also changed from intra-regional to inter-regional agreements. 62 III.2 The proliferation of RTAs ( ) The multilateral trade system has witnessed phenomenal growth in the number, coverage, and scope of RTAs. 63 Contemporary literature on trade regionalism distinguishes between what is known as old regionalism and new regionalism. 64 Old regionalism was characterised by regional trade agreements formed in the bipolar war context of the 1960s and 1970s. 65 Regionalism during this period was characterised by strong protectionist standards and the unwillingness of trading partners within a region to have dependency on foreign products J.P. Trachtman, International Trade Regionalism in: A.T. Guzman and A.O. Sykes (eds.), Research Handbook of International Economic Law, Massachusetts: Edward Elgar Publishing 2006, p See (accessed 23 July 2015). 62 WTO, Overview of Developments in the International Trading Environment document WT/TPR/OV/12 (2009) 36 par. 18 at: (accessed 3 August 2015). 63 See C.B. Picker, Regional Trade Agreements v. The WTO: A Proposal for Reform of Article XXIV to Counter this Institutional Threat, University of Pennsylvania Journal of International Economic Law, , p. 273; T. Cottier, The Challenge of Regionalism and Preferential Relations in World Trade Law and Policy, European Foreign Affairs Review, , p See WTO Press Release Fast-Changing Nature of World Trade Poses New Challenges 18 July 2013 at (accessed 22 July 2015); L. Van Langenhove & A. Costea, The Relevance of Regional Integration, Comparative Regional Integration Studies Programme (UNU-CRIS), , pp. 3-6; E.D. Mansfield & H.V. Miller, The New Wave of Regionalism, International Organization, , pp B. Hettne, The United Nations and Conflict Management: The Role of the New Regionalism, Transnational Law and Contemporary Problems, , pp. 643 & R. Devlin & A. Estevadeordal, What s New in the New Regionalism in the Americas?, Inter-American Dev. Bank, Working Paper No. 6, 2001, pp. 14.

11 13 WINTER ISSUE 2017 Regional trade arrangements established after the 1980s are known as new regionalism. New regionalism is characterised by RTAs formed in a multi-polar context, and having environmental, political, social and democratic objectives. 67 It is also characterised by integration across the North-South divide, with a number of schemes involving both developing and industrialised countries. Several of the new agreements are cross-regional in that the members extend over more than one of the world s geographic regions. The increased interest in regionalism in the 1980s was prompted by the uncertainty of a successful conclusion of the Uruguay Round of multilateral trade negotiations ( ). 68 The uncertain fate of the Uruguay Round prompted many countries to pursue preferential deals as an insurance against an eventual failure of multilateral trade negotiations. 69 But even after the successful conclusion of the Uruguay Round and the establishment of the WTO, interest in RTA formation did not diminish. 70 Instead, there has been a boom in RTA negotiations from that time on. In the period between 1948 and 1994, the GATT received 123 notifications of RTAs (relating to trade in goods), and, since the creation of the WTO in 1995, over 300 additional arrangements covering both trade in goods or services have been notified. 71 With the Doha Round stalling, legislative focus in the international trade sphere shifted to the negotiation of more RTAs. 72 At the end of 2012, the WTO Secretariat published the following chart, which shows the facts and figures of all RTAs notified to the GATT/WTO from 1948 to 2012 by year of entry into force: 67 C.H. Lin, Regionalism or Globalism? The Process of Telecommunication Cooperation with the OAS and NAFTA, International Trade Law Journal, 2002, pp S.J. Powell & P.C Perez, Global Laws, Local Lives: Impact of the New Regionalism on Human Rights Compliance, Buffalo Human Rights Law Review, 2011, p J. Crawford & R.V. Fiorentino, The Changing Landscape of Regional Trade Agreements WTO Discussion Paper No. 8, 2005, p. 6 at (accessed 23 July 2015). 70 T. Srinivasan, Developing Countries and the Multilateral Trading System: From the GATT to the Uruguay Round and the Future, New York: Westview Press 1998, pp See (accessed 24 June 2015). 72 F. Hammond, A Balancing Act: Using WTO Dispute Settlement to Resolve Regional Trade Agreement Disputes Trade Law and Development, , pp

12 14 AMSTERDAM LAW FORUM VOL 9:1 Fig. 1: The Proliferation of RTAs. Source: WTO Secretariat. 73 From the above chart, it appears that the proliferation of RTAs has accelerated exponentially since the years of the Uruguay Round negotiations. We can also see that, by the end of 2012, there had been over 300 RTAs in force and over 500 notifications. As of 10 January 2013, some 546 notifications of RTAs (counting goods, services and accessions separately) had been received by the GATT/WTO. 74 Of these, 354 were in force. There are approximately 100 RTAs in the pipeline (signed, not yet in force or under negotiation). 75 These figures prove without a doubt that RTAs are a major and perhaps irreversible feature of the multilateral trading system. 76 The impasse in the Doha Development Agenda negotiations is further strengthening WTO members' resolve to conclude RTAs, and indeed new RTA initiatives have emerged in recent years whose effects will be felt in the years to come. A notable feature in the recent rise of regionalism is that countries that had traditionally favoured the multilateral approach to trade liberalisation, including Australia, New Zealand, Japan, Singapore, India and the Republic of Korea, have now joined the RTA bandwagon. 77 This shows that the shift to regionalism is an inevitable trend. Motivations behind the proliferation of RTAs vary across regions. The formation of RTAs is driven by a variety of factors which include economic 78, political and security considerations. 79 It is important to understand those factors or reasons because they allow a greater understanding of the feasibility of any proposal to 73 See (accessed 24 June 2015) 74 See (accessed June 2015). 75 Ibid. 76 Crawford & Fiorentino 2005, supra note 69, p Mashayekhi, Puri & Taisuke 2005, supra note 4, p This study will not delve into an economic analysis. For a serious economic analysis of why countries would choose one form over another see B.V. Yarbrough & R.M. Yarbrough, Cooperation and Governance in International Trade: The Strategic Organisational Approach, New Jersey: Princeton University Press 2014, pp Crawford and Fiorentino 2005, supra note 69, p. 16.

13 15 WINTER ISSUE 2017 regulate RTAs, so as to reduce their negative impacts on the WTO multilateral regime. Firstly, due to their less-crowded nature, RTAs have provided a comparatively efficient means by which members can pursue their trade liberalisation goals, through the negotiation of reduced trade barriers and also improved rules. Therefore, RTAs are easier to administer. Mutually beneficial relations also increase RTA members bargaining power in multilateral negotiations, by securing commitment first on a regional basis. 80 Secondly, the conclusion of RTAs is driven by the search of access to larger markets, which are easier to engineer at the regional or bilateral level, particularly in the absence of a willingness among WTO members to liberalise further on a multilateral basis. 81 Thirdly, membership in RTAs also provides a means of securing foreign direct investment, particularly for developing countries with low labour costs, which have access to larger more developed markets: developing countries commit themselves to signing reciprocal RTAs with developed countries in order to secure access to their markets. 82 Political considerations also foster regional trading arrangements. Governments seek to increase regional security and consolidate peace with their RTA partners. 83 For example, the original European Economic Community and European Coal and Steel Community were famously motivated by a desire to make war between Germany and France impossible. 84 According to Bhagwati, 85 frustration with the multilateral trading system is also another factor driving the proliferation of RTAs. Governments view regionalism as an easier alternative because the large number of participants in multilateral trade negotiations creates rigidity in the system. Also according to Bhagwati, 86 modern trade barriers are much more complicated to negotiate in a multilateral forum, and most countries find it easier to deal with these issues on a bilateral or regional level. This means that negotiations are more efficient at regional level because the regimes are less complex. Progress is very slow in the multilateral agenda. 87 Therefore, the stagnation in multilateral negotiations may, for example, create incentives for states to pursue preferential trade liberalisation and encourage exporters to lobby their governments for more PTAs See E. Mansfield & E. Reinhardt, Multilateral determinants of regionalism: the effects of GATT/WTO on the formation of preferential trading arrangements, International Organisation, , pp Ibid. 82 Crawford and Fiorentino 2005, supra note 69), p S.R. Khan, Regional Trade Integration and Conflict Resolution, London and New York: Routledge 2009, p Trachtman 2006, supra note 60, p J. Bhagwati, Regionalism versus Multilateralism, The World Economy, , p Ibid. 87 This has been evident in the Uruguay Round which took seven years, and now the Doha Round since 2001 which is still ongoing. 88 World Trade Organisation, The WTO and Preferential Trade Agreements: From Co-existence to Coherence World Trade Report, 2011, pp See also the case studies in A. Capling & P. Low, Governments. Non-State Actors and Trade-Policy Making, Cambridge: Cambridge University Press 2010.

14 16 AMSTERDAM LAW FORUM VOL 9:1 It has also been observed that RTAs have proliferated because multilateral negotiations on a global scale have become more difficult in certain areas, as the subjects of multilateral negotiations in the WTO framework have been expanded into politically sensitive areas such as trade and investment, trade and competition policy, intellectual property rights and epidemics. 89 As an alternative to multilateral negotiations on a global scale that could take years to reach any consensus, nations have begun to resort to trade negotiations among a more limited number of countries sharing common interests in trade and investment, closer economic and cultural ties and geographic proximity. This trend has led to the formation of more RTAs around the world. IV. Relationship with the WTO: WTO Rules Regulating RTAs The WTO endeavours to regulate regional trade agreements under its rule-based system. To do so, it uses various norms, procedures and organs which attempt to discipline trade regionalism according to specific parameters. From its inception, the GATT (now the WTO) has not prohibited member states to conclude customs unions or free trade areas. There is, however, a requirement pursuant to Article XXIV (7) of the GATT that the WTO must be notified of an RTA as soon as it is concluded. This means that members of an RTA should not put in force or maintain any RTA unless they comply with the WTOs members recommendations for making the RTA concerned WTO consistent. However, in practice, no RTA has ever been explicitly approved as being WTO consistent, because of the consensus decision-making practice of the WTO: RTA parties will generally refuse to make any changes demanded by non-rta members. 90 Therefore, the consensus requirement thwarts the adoption of compliance recommendations by WTO members. The GATT allows the development of regional or free trade areas. By allowing the development of regional trade areas, the GATT effectively created an exception to the fundamental principle of non-discrimination set out in the most-favourednation provision of Article I. 91 Hence, Article XXIV of the GATT 1994 allows 89 See M. Matsushita, Legal Aspects of Free Trade Agreements in the Context of Article XXIV of the GATT 1994 paper presented at the United Nations University Seminar: The Way Forward to Successful Doha Development Agenda Negotiation Tokyo Japan (May 24-25, 2004). The failure of the WTO ministerial conference in Cancun has also shown this difficulty: See S. Cho, A Bridge Too Far: The Fall of the Fifth WTO Ministerial Conference in Cancun and the Future of Trade Constitution, Journal of International Economic Law, , pp G. Marceau & J. Wyatt, Dispute Settlement Regimes Intermingled: Regional Trade Agreements and the WTO, Law and Social Sciences Journal of International Dispute Settlement, , p Article 1 of the GATT states in part that any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. In effect this means that trade concession granted to one member must be applied immediately and unconditionally to all other WTO Members. RTAs are therefore an exception to this

15 17 WINTER ISSUE 2017 regional trading arrangements to be set up as a special exception, provided that certain strict criteria are met. This exception allows members to adopt measures that are WTO-inconsistent, taken in the context of regional economic integration. 92 The rationale for this exception is that the preferential trade arrangement of an RTA could eventually develop into a multinational framework, thereby giving the benefit of lower trade barriers to more countries as the number of participating countries increases. 93 Therefore, the provisions of Article XXIV are prima facie considered to serve the objective of global trade liberalisation rather than hinder it. When RTAs are in conformity with the rules of Articles XXIV GATT and Article V General Agreement on Trade in Services (GATS), there is deemed to be no conflict with the WTO. This means that there is a hierarchy between the WTO and the respective legal systems of RTAs, 94 a hierarchy not based upon subordination but on conformity. Article XXIV stipulates that RTAs should be designed to facilitate trade among the parties concerned and not raise barriers to the trade of third parties. Thus, RTAs are required to liberalise substantially all trade among the parties and not to raise additional barriers against outsiders. Article XXIV is commonly viewed as an exception to the MFN rule, allowing a subset of members to liberalise trade between them, but without extending such liberalisation to all other WTO members. 95 The provisions of Article XXIV are thus capable of operating as exceptions or as defences that can be invoked by a WTO member to justify a measure that would, otherwise, be in violation of its WTO obligations. 96 For example, the Appellate Body in Turkey Textiles insisted that Article XXIV of the GATT 1994 may be invoked as a defence to a claim of inconsistency with Article XI of the GATT and Article 2(4) of the Agreement on Textiles and Clothing, provided that the conditions set forth in Article XXIV for the availability of this defence are met. 97 This case is further discussed in the case studies section below. The Article XXIV rules are further elaborated in the Understanding on the Interpretation of Article XXIV of the GATT 1994, which forms part of the GATT provision since they are allowed to make preferential trade concessions within members of the region or trade bloc. 92 Van Den Bossche & Zdouc 2012, supra note 7, p Lee 2006, supra note 2, p P.J. Kuijper, Conflicting Rules and Clashing Courts: The Case of Multilateral Environmental Agreements, Free Trade Agreements and the WTO, International Center for Trade and Sustainable Development Issue Paper No. 10, 2010, p See J.H. Jackson, World Trade and the Law of the GATT, Lexis Law Publishing 1969, p. 576; P. Hilpold, Regional Integration according to Article XXIV: GATT Between Law and Politics in Bogdandy and Wolfrum (eds.), Max Planck Yearbook of United Nations Law, 2003, pp ; Panel Report Brazil- Measures Affecting Imports of Rethreaded Tyres WT/DS332/R, 12 June 2007 par Marceau & Wyatt 2010, supra note 90, p Appellate Body Report Turkey Restrictions on Imports of Textile and Clothing Products WT/DS34/AB/R adopted 19 November 1999 DSR 1999:VI 2345 at par 45.

16 18 AMSTERDAM LAW FORUM VOL 9: The WTO has endeavoured to limit the misconstruction of Article XXIV by expressly elucidating some of its provisions in the Understanding. 98 This Understanding was intended to clarify the meaning of some of the ambiguous obligations contained in Article XXIV, by elucidating the brief text. The Understanding seeks to clarify the criteria and procedures for assessing new or developed agreements and to improve transparency. The Understanding, therefore, is an integral part of the rules governing RTAs under the WTO. Article XXIV of the GATT 1994 prescribes some conditions to be met only by RTAs for trade in goods. 99 For trade in services, RTAs are governed by Article V of the GATS 100, which places requirements similar to those of Article XXIV. Article V of GATS is similar in intent, both with respect to the effects on outsiders of discriminatory liberalisation and the coverage among the parties to an agreement, although the provisions are phrased in somewhat dissimilar language to take account of differences in how services trade is conducted. With regard to developing country-members, preferential trade agreements between them are regulated by an Enabling Clause, dating from The enabling clause stipulates, just like Article XXIV (4), that the main purpose of RTAs of developing countries should be facilitating trade among themselves, and not creating barriers with other members. 102 The Enabling Clause relaxes (some of) the GATT provisions on PTAs for developing countries in the name of special and differential treatment for this group of countries. But, as for agreements involving developing and developed countries, WTO members are required to seek a waiver of the WTO rules. Commentators argue that the Enabling Clause is also an exception to Article I of the GATT. 103 The conditions laid down in all of these provisions seek to guarantee that the general clause of trade liberalisation among all members does not suffer from such agreements inter se. 104 In order to determine the compatibility of RTAs with the WTO rules stated above, the General Council of the WTO established the Committee on Regional Trade Agreements (CRTA) in This Committee is the organ mandated to examine 98 Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade These are supplemented by the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade The GATS refers to the conclusion of RTAs as Economic Integration Agreements. See Article V of the GATS. 101 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries 28 November 1979, GATT B.I.S.D. (hereafter The Enabling Clause ). 102 Idem, par G.Z. Marceau & H. Irfan, Is there a necessity test within Article XXIV of the GATT 1994? And if so, is it applicable to RTAs among developing countries covered by the Enabling Clause? Unpublished paper presented at the University of Edinburgh School of Law on Regional Trade Arrangements, June 2005, p Kuijper 2010, supra note 94, p The Committee on Regional Trade Agreements (CRTA), WTO General Council Decision WT/L/127 (7 February, 1996).

17 19 WINTER ISSUE 2017 agreements of proposed RTAs referred to it by the Council of Trade in Goods (that is, agreements falling under Article XXIV of the GATT 1994), the Council for Trade in Services (Agreements under Article V of the GATS), and the Committee on Trade and Development (Agreements notified under the Enabling Clause). The CRTA is also mandated to facilitate the examination process and ensure proper reporting on the operations of RTAs. The CRTA also has the important task of considering the relationship between RTAs and the multilateral trading system, as well as the systemic implications of RTAs to the MTS. 106 At the time of the launch of the Doha Round in November 2001, the CRTA had made no progress on its mandate of consistency assessment due to the questions of interpretation of the provisions contained in Article XXIV of the GATT WTO members had not been able to reach consensus on the format, nor the substance of the reports on any of the examinations entrusted to the CRTA. The stalemate in that area also resulted in little or no progress in the other areas falling under the CRTA mandate. These factors prompted further attempts to develop detailed rules for RTA regulation in the ongoing Doha round of trade negotiations. Concerns over the increasing number of RTAs and a malfunctioning multilateral surveillance mechanism prompted the Ministers meeting at the Fourth Ministerial Conference in Doha in November 2001 to include RTA rules under the Doha Development Agenda (DDA). In the Doha Ministerial Declaration 108, WTO members recognise that RTAs can play an important role in promoting trade liberalisation and in fostering economic development, and stress the need for a harmonious relationship between the multilateral and regional processes. 109 On this basis, Ministers agreed to launch negotiations aimed at clarifying and improving existing WTO provisions, with a view to resolve the impasse in the CRTA and minimise the risks related to the proliferation of RTAs. A formal agreement was made in July 2006, when a Draft Decision on a Transparency Mechanism for Regional Trade Agreements was adopted. 110 This Mechanism was enacted on a provisional basis on 14 December 2006 by the WTO General Council to further strengthen the transparency requirements, 111 while awaiting the conclusion of the Doha Round. The decision is informed by the need for greater transparency on RTAs and it aims to refine the CRTA, so as to improve the WTO supervision of RTAs. 106 Committee on Regional Trade Agreements Annotated Checklist of Systemic Issues WT/REG/W/16, 26 May WTO RTAs and the WTO: A Troublesome Relationship Discussion paper at: p. 26 (accessed 23 July 2015). 108 WTO, Doha Ministerial Declaration WT/MIN(01)/DEC/1 adopted on 14 November Idem, par WTO General Council Transparency Mechanism for Regional Trade Agreements Decision of 14 December2006 WTO Doc. WT/L/ December WTO General Council, (Provisional) Transparency Mechanism for Regional Trade Agreements, Dec14, 2006 at: (accessed 13 June 2015).